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Monday, September 19, 2016

Sometimes I'm tempted by the thought that a major economic reform would be for the Business Council of Australia to disband, so the nation's big business chiefs had to spend more time doing their knitting.

For them to spend less time attending committee meetings to decide what the government should be doing to make life easier for them and their business, and more time working on ways to improve their company's performance.

It always surprises me that economist upholders of free markets and business defenders of private enterprise so easily fall into the view that the fate of our largely private-sector economy rests on the actions of politicians.

Econocrats are susceptible to that misconception because their model's assumption that business decisions are always rational leads them to conclude any inadequacy in businesses' performance must arise from perverse incentives created by misguided government intervention.

For their part, it's almost unknown for business leaders to explain their company's poor performance as anything other than someone else's fault. The failures of our hopeless government – any government – have long been the favourite excuse of less-than-successful chief executives.

An entire career in the private sector has inoculated me against any delusion that businesses are always rational and never perform at less that their best.

One common human failing you won't find in any economics textbook is managers' tendency to be so busy fixing problems they find easy to fix that they have no time to grapple with more important problems they're not sure how to fix.

We worry about the era of low productivity and low growth our economy – and every other advanced economy – seems caught in, and it's true there are "reforms" governments could make that would improve our performance – though they're not the reforms highest on the business council's list.

But the deeper truth remains that the nation's productivity is fundamentally determined by the performances of its many businesses. And if our business leaders took it into their heads to lift their companies' performance, the nation's productivity improvement and growth would be faster.

If you don't believe that, you must be a socialist.

A study by Deloitte Access Economics for Westpac assembles evidence that there's plenty of room for improvement in the performance of Australia's managers.

A report prepared for the federal government in 2009 used the methodology of the World Management Survey to rank the quality of our management sixth of 16 countries studied, behind Canada, Germany, Sweden, Japan and the US.

A paper by Nicholas Bloom and others, from Stanford University, finds that well-managed firms perform better than their peers and make a greater contribution to a nation's total-factor productivity.

Differences in how well-run businesses are help explain differences in productivity between nations. For instance, thanks in part to its successfully run businesses, the US has one of the highest total-factor productivity levels in the world.

Bloom and colleagues estimate that, across all countries, 29 per cent of the difference in productivity between the US – which has the highest management effectiveness scores – and other nations can be explained by how well businesses are run.

Using this finding, Deloitte Access estimates that, if the gap in management quality between Australia and the US were halved today, our productivity would rise to 80 per cent of the US level, up from its present level of 77 per cent.

Achieving such an increase today would lead to a 4.3 per cent increase in gross domestic product over its present level.

This represents an increase in GDP of about $70 billion, equivalent to about $3000 a person per year.

Such a boost would raise our ranking on the league table of GDP per person (adjusted for differences in the purchasing power of particular currencies) from 19th to 14th in the world – just the "metric" that so appeals to the top dogs on the Business Council.

Deloitte Access concludes from other research that fast-growing businesses "take an attitude that success is in their hands and nobody else's.

"High-growth firms perceive issues they cannot control – such as economic conditions and competition – as less of a barrier to success than [do] low-growth firms, placing greater concern on issues they can control, such as recruitment and cash flow …"

So "businesses' own decisions and strategies drive their success. The state of the economy and industry trends are clearly important factors affecting business profitability …

"But business success can come during any market conditions, and opportunities can arise in any industry, provided there's the right leadership to seize potential."

So that's what our over-paid and under-performing chief execs are getting wrong.